Littelfuse, Inc.

Good day, everyone, and welcome to the Little Fuse Third Quarter 2021 Earnings Conference Call. Today's call is being recorded at this time. I will turn the call over to the Head of Investor Relations, Tricia Tuntman. Please proceed.

Good morning, and welcome to the Little Fuse Third Quarter 2021 Earnings Conference Call. With me today are Dave Hindsman, President and CEO, and Nino Sethna, Executive Vice President and CFO. Yesterday, we reported results for our third quarter, and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today's conference call will also be available on our website. Please advance to slide two for our disclaimers. Our discussion today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday's press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations. We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided on our earnings release available in the Investor Relations section of our website. I will now turn the call over to Dave.

Thank you, Tricia. Good morning, and thanks for joining us today. Let's start with slide four. We delivered a quarter of outstanding performance with our ability to effectively execute within this challenging supply chain environment. Building on our strength over the past several quarters, our highly skilled teams are continuously improving our global operations to meet customer demand, and our results reflect their commitment and hard work. We achieved record third quarter performance with sales of $540 million and adjusted EPS of $3.95. MENA will provide additional color on our strong financial results. Moving on to performance within our segments. During the third quarter, our electronics product segment experienced strong revenue growth. Our performance was driven by our ongoing operational execution and capacity additions coming online to work through our customer backlog. We drove exceptional production volumes and high shipments to North America, where bookings have been strong. Globally, we continued strength across a broad range of applications, including data center and telecom infrastructure, factory and building automation, appliances, and automotive electronics driven by EV applications. Global sales remained strong, and exiting the third quarter, our electronics book-to-bill remained above one. But we do see some slowing in bookings in China. There is some evidence of electronics in customers building inventory, and distribution partners are working to increase inventory levels. However, weeks of inventory remain lean. Moving on to our automotive product segment, we achieved solid growth within a difficult supply chain environment for the past thanks to the hard work of our global teams. Our third quarter performance was impacted by customer shutdowns in all regions, with the ongoing chip shortage. Despite this, our passenger vehicle business grew 13% versus last year, while global car bill declined. Our growth was driven by a continued content growth in electric vehicles, the favorable mix of higher-end vehicles, and share gains in China on low voltage systems. Although a less significant factor, we are also seeing some customer inventory build coming from partially built cars not reflected in car build data, and some inventory build at tier ones. There continues to be strong demand across the commercial vehicle end markets. However, we are seeing similar supply chain disruptions across suppliers and customers. Demand for our commercial vehicle products was driven by strength in material handling, truck and bus, and construction and agriculture equipment markets. Looking ahead, we expect ongoing supply shortages and customer shutdowns. This is further validated by the significantly lower industry car build forecast of 75 million cars, which reflects nearly flat car builds year on year. Beyond this noisy backdrop, we see a number of ongoing costs and commercial vehicle and markets we serve. Turning to our industrial product segment, a number of our core markets continue to show strength during the third quarter, primarily HVAC, renewables, energy storage, and general industrials. Mining continues to improve, and non-residential construction and North America oil and gas markets are seeing pockets of recovery. Going forward, we expect continued solid demand with typical seasonal softness in HVAC and MRO markets. Turning now to acquisition activity on slide five, I'm pleased to report that on October 20th, we made further progress on our growth strategy with our announcement to acquire Carling Technologies, a global leader in switching, circuit protection, and power distribution technologies. With its strong brand name and a long history of innovation, quality, and reliability, Carling enhances our presence and growth in commercial vehicle and telecom infrastructure markets through our complementary engineering capabilities, application expertise, and product portfolios. This will allow us to drive deeper engagement with a broader base of customers and distribution partners, enhancing our platform for future growth. We are excited to welcome Carling employees to the Little Juice team and expect to close the transaction during the fourth quarter of 2021. Carling will operate within our commercial vehicle business, incorporated in our automotive product segment. We look forward to discussing further during our fourth quarter earnings call. Now let's move on to key design wins in the end markets we serve. Within our industrial end markets, on slide six, we are seeing strong design wins with the growing momentum and sustainability. For HVAC applications, we continue to benefit from the integration of our Hartman Controls acquisition. In North America, we had design win for an industrial refrigeration application and leveraged a product from the Hartman Controls portfolio to secure a design win for an energy storage application. We also captured new business for energy storage and renewable energy applications across Asia, Europe, and North America. With our reputation for service, reliability, and support, we also had industrial safety design wins in North America for oil and gas and mining applications, as well as a ground fault protection win with a U.S. equipment manufacturer. Turning to our transportation intermarkets on slide seven, We leveraged our strong customer relationships and technical know-how to close out dozens of business opportunities in the quarter. We continue to invest in e-mobility and are seeing robust design activity in the EV space and secured several strategic wins in the quarter. In India, we had wins for two- and three-wheeled EV applications with protection products as well as a temperature sensor for an EV battery management system. We also secured onboard high-voltage EV wins in Korea and Europe, as well as a major win for a charging application in Europe. Within commercial vehicles, we had an important design win for our high-voltage power distribution module with a European electric bus manufacturer. We secured this win based on our engineering capabilities and successful record on a previous project. We expect the ongoing push towards electrification to drive significant new business opportunities for us, and we are excited to be a key enabler of a more sustainable and safer world. Globally, as new OEM programs for traditional passenger vehicles continue to drive greater content for our reliable protection products, we secured a wide range of design wins with a broad set of customers. With the ongoing electronification of transportation applications, we had automotive electronics wins in the quarter, securing new business in Asia for LED lighting, dashboard, and camera applications. In Japan and China, we had design wins to protect window, door, and seat motor applications. We also secured an automotive sensor win in Europe for a solar sensor application. Within commercial vehicles, we had several design wins in the quarter in construction equipment applications. Our strong customer relationships and ability to respond to customers' needs helped secure a win in North America with a global manufacturer and in China based on our high-quality product performance over a lower-cost alternative. We also secured a sensor assembly win in Europe for a heavy truck fuel heater application. In addition, design activities and material handling remain solid. With our deep partnerships, we leveraged the success of a prior win to expand our business with a European forklift manufacturer. On to slide eight. With a strong mix of product features and our reputation for industry-leading technical support, we continue to see robust design wins across a wide spectrum of applications in our electronics and markets. Driven by the ongoing trend towards a more connected world, we had two strategic data center wins in Asia, one for a network server application and the other for an uninterruptible power supply application. We secured appliance wins during the quarter in Asia and Europe and a building solutions win in North America. As the power tool market shifts from combustion engines to electrification with the focus on sustainability, we are seeing expanded content opportunities for our products. With rapid technical support, we had design wins for power tools in Asia and in North America. And separately in Europe, we secured a silicon carbide opportunity for a power supply application on a semiconductor manufacturing tool. Across the high-growth industrial, transportation, and electronics applications we target, serve, and support, we are building a pipeline of new business opportunities that aligns with our long-term growth strategy. As we continue to work closely with our customers, we remain well-positioned to provide the innovative solutions and technical expertise they require to empower a sustainable, connected, and safer world. These value-added attributes will enable us to secure our new business opportunities and ultimately grow our collective businesses for the long term. I will now turn the call over to Minal to provide additional color on our financial performance at Outlook.

Thanks, Dave. Good morning, everyone, and thanks for joining us today. Let's start with slide 10. Sales in the quarter were a record $540 million, growing 38% versus prior year and 3% sequentially. Gap operating margins were 22.3%, while adjusted operating margins were 22.8%, up 330 basis points sequentially. Operating margins and related incrementals were exceptionally strong this quarter, driven by strong performance from our electronic segment. Third quarter gap diluted earnings per share was $3.69 and adjusted diluted EPS was $3.95, up 83% over prior year and 16% sequentially. This included a gap effective tax rate of 19% and an adjusted effective tax rate of 17.6%, 160 basis points higher than our forecast due to the mix of income across geographies. While we see ongoing supply chain challenges in the marketplace, we've been able to meet demand needs through capacity additions and the exceptional performance of our operating teams globally. Input costs from metals and other materials, as well as transportation costs, continue to be the biggest headwinds and we expect a full year impact of about 300 basis points from these. We are mitigating about half of these headwinds through our pricing actions, with some additional offsets coming from lower than typical levels of discretionary spend in the ongoing COVID environment. We generated $114 million in operating cash flow and $89 million in free cash flow in the quarter. Year-to-date, we've generated $183 million in free cash flow, a 79% conversion from net income. While our working capital metrics remain in line with our expectations in this environment, cash generation year-to-date has been moderated by about $100 million from working capital growth, including holding additional stock of critical raw materials. With the level of sales growth driving this increased working capital, we expect our free cash flow conversion to be lower than 100% of net income for the year. But our five-year free cash flow conversion target of 100% remains unchanged. Moving on to our segments on slide 11, I'll start with electronics. Sales were a record $347 million, up 36% versus last year and up 7% sequentially. Sales were stronger than we expected as we worked through backlogs largely across our passive components while driving continued growth. Operating margins in the quarter were 28.9%. Our strong margins were a result of favorable regional and product mix at these robust volume levels as well as benefits from price realizations. Automotive sales were $124 million in the quarter, up 19% versus last year, and down 7% sequentially. Growth across our commercial vehicle products was 38% over last year. We saw continued strength across a number of commercial vehicle markets, especially North America and Europe, though mitigated in part by customer supply chain challenges. Sales in our passenger vehicle products grew 13% versus last year, despite car bills declining over the same period due to the ongoing chip shortage. We continued to benefit from strong content growth due to both vehicle mix and growth in electric vehicles, as well as some customers maintaining additional inventory of our products. Operating margins for this segment were 12.7%. The continued high metal prices affected margins by over 300 basis points versus last year. As we've discussed in the past, this segment is impacted the most by higher commodity prices due to product content. Sales for the industrial segment of $68 million grew 116% and 5% sequentially, with operating margins of 9.7%. The segment experienced some supply disruptions in the quarter that unfavorably impacted production levels and margins. Excluding Heartland, margins for the segment were in the low teens range. We are working towards our high teens margin target for the segment as we continue our integration efforts for Heartland. Turning to our fourth quarter outlook on slide 12, end customer demand remains strong. We've incorporated currently known challenges across manufacturing and supply chain operations into our forecast, including across our customers and suppliers. We also assume there are no new material disruptions from COVID. We expect fourth quarter sales in the range of $503 to $517 million, up 27% versus last year. We expect to be down 5% sequentially at the midpoint, closer to our typical seasonality, with sales down across all of our segments. We project fourth quarter adjusted EPS to be in the range of $2.80 to $2.96. This assumes an adjusted effective tax rate of 18.5% for the quarter. The fourth quarter EPS midpoint is down 27% sequentially and up 29% over prior year. Our forecast reflects the impact of sequentially reduced volumes across all of our businesses and more typical product and geographical mix across the electronic segments. The forecast also includes a 14th week due to our reporting calendar. As this is during the holidays, we expect sales and profitability in that week to be lower than normal. Also, our forecast does not include any impact from the pending Carling acquisition, and we don't expect it to have a material impact to our fourth quarter results. will share further details on Carling during our fourth quarter earnings call. For the full year, we are projecting a tax rate of 17.5% and capital expenditures of approximately $80 to $85 million. And with that, I'll turn it back to Dave for some final comments.

Thanks, Mito. Before concluding, as highlighted on slide 13, I'd like to mention that we have published our 2020 sustainability report, which is available in the investor relations section of our website. The report highlights our commitment to environmental, social, and governance initiatives. We have focused our efforts on creating a solid foundation for our sustainability program to ensure future success as we work towards the goals discussed throughout the report. We are pleased to share our progress and look forward to providing future updates as we strive for continuous improvement on our sustainability journey. In summary, on slide 14, year-to-date, we have delivered exceptional performance within an ongoing challenging environment. We continue to closely monitor supply chain challenges across our suppliers and customers and have proven our sound business fundamentals enable us to strategically grow. As we near the end of a challenging 2021, We are poised to achieve significant revenue and earnings growth for this year and remain well positioned to deliver ongoing superior value for our stakeholders. And with that, I will now turn the call back to the operator for Q&A.

Thank you. To ask a question, you will need to press star 1 on your telephone. And to withdraw your question, just press the pound key. Once again, that's star 1 for questions, 1 moment for questions. Our first question will come from the line of Luke Junk from Baird. You may begin.

Good morning. Thanks for taking the questions. First, maybe a question from Muno. Wondering if it would be possible to provide sort of just a high-level margin walk from the longer-term range for electronics margins to this quarter's results. I don't know if you can put some of the factors that you spoke to in the prepared marks into buckets. Essentially what I'm trying to tease out here is what might be sustainable if higher absolute levels of activity persist versus what was, you know, likely more one-time in nature this quarter? Thanks.

Sure, Luke. So just stepping back, right, we had definitely very strong sales, very strong margins across the electronic segments of the quarter. You know, I'd call it all the stars aligned, really, for the quarter on this. To your point on bucketizing it, I mentioned favorable product mix, both geographic or regional product mix, as well as on the product side. I'd say that was about two-thirds of it, and I would say that was atypical for us, which really drove that strong margin profile we had. I'd say another third came from a combination of the stronger volumes that we saw, much higher than we expected. A big part of that was coming from us really working to clear out backlogs that we've had, as well as just with all the supply chain choppiness going on. We had some, you know, at very, very late in the quarter, we had some deliveries that basically came through to customers, and so revenue got recognized that probably – would have been in the fourth quarter on that. And then I'd say as part of that last third also, price realization. We've been talking about pricing, that we've been taking a lot of pricing actions, and you can see the benefit of that most significantly in the electronics segment just because of our go-to-market strategy there.

Okay, that was really helpful. Thank you for that detail. I have a question for Dave in terms of distributors in the electronics segment and just Wondering your view on the appetite for inventory restocking. You had mentioned inventory at distributors. In your comments, what that might look like as the industry theoretically catches up to demand from a supply standpoint. Distributors are obviously a big part of the electronics business. What are you hearing from them? And ultimately, how meaningful of a driver could this be if we start looking out into 2022? Thanks. Sure. Thanks.

We watch very carefully to look for kind of signs of inventory building and things like that. We've talked openly about the fact that on average for our distribution partners and electronics portion of our business, weeks of inventory kind of normal range is 11 to 14. It remains lean today. Obviously, our distribution partners would like to build more inventory, and they have orders on us to do that in some cases. But sell-through continues to be very robust. So really, there's not a lot of inventory build yet in the channels there. With that said, there clearly is some evidence that some of the EMS partners and some OEMs are trying to carry some heavier inventory positions than normal. So there are pockets out there where there's some inventory build. Right now, it's not really in our distribution partnerships yet. So we continue to watch that. So they're certainly, they have an appetite, you know, to try to increase that. And so we'll see how that develops in the coming quarters. I'll leave it there.

Thanks, Luke. Appreciate your questions. We'll take our next caller, please.

Our next question comes from Carl Ackerman in Cowan. You may begin.

Good morning, Carl.

Hey, good morning. Thanks, everyone. Congrats on the results. If I may, I'd also like to discuss electronics. How much of the uplift in electronics is coming from automotive electronics being sold into battery electric vehicles and hybrids? I guess what I'm trying to understand is how much of the uplift in electronics operating profit this year and also this quarter has been driven by new products that arguably carry higher than corporate average profitability, not just today but also going forward.

Yeah, so I'll take that, Carl. I think clearly we're seeing automotive electronics being one of the growth drivers within our electronics segment, along with several other end markets that are quite robust, whether it's datacom applications, telecom infrastructure, those appliances, building and home automation sorts of things. There's a lot of end markets that are pretty robust. Automotive electronics is certainly there. And while on broad-based applications, car builds are pretty soft, obviously, but a lot of that growth is coming from electrification applications there. I would not say that the automotive electrification opportunities have a margin profile above our norm. So new products are always important for us to sustain high margins in our business in electronics. So continually rolling out new versions, new products, and new introductions, you know, keeps our margins up. That's a key part of our strategy. But I don't think automotive electronics is kind of outdriving that at this point.

Understood. Thanks for that. I want to shift to pre-cash flow and balance sheet, if I may. Inventory days on your balance sheet rose significantly. you know, I think roughly 10% sequentially, that's 96 days, that appears to be largely in line with where inventory has been in the past. And so I guess my question is, are you comfortable with the amount of inventory you have on your balance sheet today to support existing customer demand? And then secondarily, how might we think about working capital flow through both in the calendar of Q4 and the early part of 2022, as you start to attain some of that order backlog from customers.

Thank you. Sure. In general, I talked about in the prepared remarks that we've seen about $100 million of cash flow tied up in working capital since the beginning of the year. about 70% of that coming from inventory, and we've seen about a 10-day increase in our days of inventory on hand. You know, what I would say is just from a dollar perspective, about a third of that increases really just because of the higher level of sales we have, so that doesn't impact the days. And I would say the rest, it's really two main drivers, one really being, again, from the prepared remarks I mentioned with raw materials, We are instructing our businesses, and they've come back to hold excess inventory of critical parts exactly so we can support customers for things that are a little harder to get or where we feel like there are some supply chain issues that we want to get ahead of. And then the second piece is just with all, again, supply chain shoppiness, we're seeing, of course, longer transportation times. some logistics bottlenecks. We have, where we can, from a cost perspective, migrated transport to ocean as well, and so that extends the amount of inventory we have sitting out there. So that's really the other factor that's out there. I think if things start to normalize in some of those areas, we would definitely work on bringing that down. And then really your last question on just, you know, other parts of working capital. I would say the rest of the working capital bill is largely in receivables. It's just in line with sales at this point. Our metrics are well in line with what they've been in the past on big sales, outstanding, et cetera. So as we start to level off, we'll see a more even flow from a cash flow perspective. Very helpful. Thank you.

Thanks, Carl. Appreciate your questions. We'll take our next caller, please.

Our next question comes from Christopher Glenn from Oppenheimer. Good morning, Chris.

Hey, good morning. Congrats on some fine numbers there. So I'm surprised that I haven't heard you call out kind of mix to this extent in electronics. You know, sometimes mix can have a little bit of a fundamental secular pivot too, and that may be the case at automotive. right now. But, you know, given, you know, over 100% sequential incrementals and approximately 100% decrementals implied 3Q to 4Q, I'm curious if we could just spend a little more time on that. Sure, Chris.

So, you know, similar to the earlier question we got about this, I would say, again, the bulk of the outside margin that we experience across the electronic segment really was, again, I'll call it the star of the lining. I know a lot of people talk about mix, but for us in terms of the product mix, you know, within the segment we've got a lot of different product lines. We happen to see some stronger sales in the more favorable margin product lines that we have. And then also David commented in his prepared remarks we had, you know, some stronger demand in North America. And, again, that's favorable mix for us. So it just happened to be with the composition in the quarter that That was really the bulk of the favorability that came through. And I would also say, you know, the comment on volumes and we're guiding sequentially down, which, again, is very typical for us with normal seasonality way buying patterns work. And so we had some outsized volumes, again, come through. This time with the transportation choppiness going on, and we had some customer receipts clear in the third quarter that we were expecting wouldn't happen until the fourth quarter. So that's why I come back to, you know, we've always talked about our target margin profile. It can easily sometimes be over 20%, but we never quote, hey, we're always going to have the same margin every quarter. You know, the second goes through up cycles, down cycles, and so we're looking at the multi-year, multi-quarter average here. which, you know, can be around 20% or so, and we're going to have some outsized and some downsized quarters as part of that.

Okay, great. And the silicon carbide, when caught in the air, I'm curious if you could just put that into context of your overall initiative around SICAR.

Yeah, yeah, silicon carbide, you know, I've talked about that in the past. We see it as a critical part of our product offering in our power semiconductor business. You know, so as we talk target medium and high power applications, silicon carbide obviously creates some advantages within that. And while we're not kind of all in, if you will, on silicon carbide, going after the kinds of capabilities and volumes to support maybe traction drives in passenger car, we target these other areas where we bring unique value. This happened to be in the case of the semiconductor manufacturing equipment. And we got a nice design win in the power supply systems within that. certainly a growing market these days. And so it was a good win there where we brought some unique value.

Thanks. Just last one, if I might. As you look for electronics, as you look at your book-to-bill fulfillment and sell-through, various factors, how would you assess the signals for early read on top-line expansion prospects for 22? Yeah.

Certainly those are all the questions we had. We happened to have an event last night with many of our senior leaders from distribution partners and rep partners, and so we had a lot of discussions around that. And what I would say is the fundamental underlying drivers of the demand profile continue to look pretty robust. We don't really see near-term changes to those fundamental drivers, but Obviously, it's a pretty hot market right now, and there are shortages out there and things, so we watch very carefully for inventory builds and things like that, like I spoke about earlier. But right now, I think we're pretty optimistic about what 2022 looks like in the electronics side of the business, as well as the overall business. But certainly in electronics, we tend to be pretty optimistic about next year.

Thanks for the candor.

Our next question will come from the line of Nick Tocero from Longbow Research. You may begin.

Yeah, hi, thanks. Yeah, thanks, and good morning. Congrats on great results. I also have a question around the whole electronics margin and kind of the step down sequentially in the fourth quarter. If we look and compare the results versus the June quarter, which are kind of comparable in terms of volume to the December quarter, it still looks like the decrement on the gross margin and operating margin line is about 80%, which is quite a bit above normal. And I think you spoke about a third of the improvement coming up from price, which doesn't show up at least in the December quarter at are you seeing incremental price pressure into the December quarter, or how should we square the fact that, you know, margin, alternating margin is coming down all the way to give it about 18%, you know, versus 19.5% in the June quarter?

Sure. So, you know, on the decrementals, and really what you're looking at is from a company perspective, we gave just some general color that all of our segments would be sequentially down on sales, but the decrementals are really total company. What I would say is if you look at Q2 versus Q4, a couple of big factors that we've been talking about. One is with sales down, our production volumes are also down versus the second quarter. So, you know, we've talked about a number of times we get good leverage on production. So, you know, when production levels are down, not just necessarily electronics, but also across our automotive segment as well as our industrial segment, we're seeing the unfavorable leverage impact on that. And if you look at the trend on both metals, pricing on metals, which is, you know, a big headwind for us that I've been talking about for some time, those costs are up also over that period of time, as well as the logistics costs, right, that those have gone up over the past couple of quarters as well. And I would say, you know, lastly, I talked about the fact that our reporting calendar includes that 14th week, which we expect to be pretty weak in sales today. frankly, you know, pretty weak in profitability as well because you take an entire week of expenses, but it's kind of a sub-week on sales. So the combination of all that is really what's driving the, you know, the deprimentals to look as they are.

Okay. That makes sense. Also, can you talk about cost increases? So I think you mentioned that you've passed half of the inflation cost you've seen. Is that across the company or is that in certain segments? How much of cost have you passed through in automotive, and how much do you expect to pass through at the beginning of 2022 when you potentially negotiate a new contract?

Yeah, so the numbers I quoted were really total company. Right, and as a recap, I talked about for the year, from where things are at right now, we're looking about 300 basis point headwind, largely due to the metals, the metals pricing year over year, as well as just the increased cost from a logistics standpoint. Again, from a company perspective, we're offsetting about half of that from price, and it's still consistent with what I've mentioned the past couple of quarters, that we really see much more of the pricing benefit coming through our electronics segment. Again, because of our go-to-market strategy, very heavier in distribution where the price increases came through. And to the other end of the spectrum is across the automotive segment, whether that's in our passenger vehicle or even commercial vehicle businesses, a lot of long-term contracts in place with a number of different OEMs, and so pricing moves a lot slower. And, yes, as we go through contract negotiations as they're coming through, we're absolutely looking at all the pricing and clauses on that, but we're going through those contract by contract, so it definitely moves a lot slower.

Okay. And maybe a last question. How should we think about the Carling technology's accretion and impact on profitability once it comes on board? And also, can you talk about what products that are coming from Carling are incremental to your portfolio and what is complementary? Okay.

Yeah, so let me talk a little bit about the product and what's complementary, you know, for our business. And, I mean, I'll speak to the financial aspects of it. But, you know, currently we're quite excited about the acquisition. We think it's a very strong fit into our business, into our strategy. It'll roll up into our commercial vehicle portion of our business, which is within the automotive segment. The product technologies they bring, they're one of the leading technologies brands and companies in switching for the commercial vehicle space, particularly strong here in North America, but also pretty strong in Europe and Asia. So we have a switching offering within our commercial vehicle today. It enhances that specifically and really takes on a leadership position now in the commercial vehicle space. They also do some power distribution systems within commercial vehicles, also an area where we've been growing nicely, so it's very complementary there. They also have an offering of circuit breakers that are really largely targeted to the telecom infrastructure space. Again, another market where our business is very focused. So it fits very well, enhances ad scale, allows us to bring more capabilities to our customers.

Yeah, and on the question on financials, you know, we're at the point in the transaction where we've just signed the deal. We're in the midst of regulatory approval right now, and so I know it's a canned answer, but right now two companies were operating independently, and so really our plan is to provide a lot of financial details I know you and others are looking for in our fourth quarter earnings call.

Thanks, Nick. Appreciate your questions. We'll take our next caller, please.

Our next question will come from the line of Matt Sheeran from Stifel. Let me begin.

Good morning, Matt. Yeah, good morning. I just have one question just regarding your comment about capacity ads certainly being beneficial for you. Could you be more specific about, you know, in terms of where you've been adding capacity and how that is impacting your lead times? Because I know lead times in electronics across your portfolio have been stretched and that's led to obviously very strong bookings and book-to-bill and perhaps some double ordering. So I'm wondering what times look like and how you expect bookings to adjust accordingly.

Yeah, Matt, you know, clearly having the capacity in place to serve our customers is a critical part of our business. So I've talked about this maybe in the past where our business is not particularly So therefore, part of our strategy is always to try to have some flex capacity in place so when we do see in cyclical markets an uptick in demand, that we can flex up better than most. Because what we find is we'll pick up some share during the up cycle, and while we won't necessarily maintain all of that because of our better ability to serve we do some of that share we retain when the cycle normalizes. So it's a key part of the strategy. We've been adding capacity really kind of across the board in all segments of the business. We've been adding capacity. Quite frankly, if we could get delivery of some of the components and equipment that we need, we'd add it faster. But just like other parts of the business, that's limited in the ability to add the capacity and speed you would like to. With that said, we're beginning to get some of that capacity online. And although our lead times have stretched, they're kind of flattened out now. So they're no longer today stretching further. So they've kind of leveled off. And we think that's kind of the first sign, right? And so I think we generally are pretty healthy in our ability to serve that need.

Okay, great. I do have one other question, just regarding your OpEx, which was down sequentially, and you talked, Meenal, about the reasons behind that. As we look to the December quarter, you've got an extra week of expenses, as you said, so should we expect actually absolute inventory, I'm sorry, OpEx dollars to be up sequentially?

Yeah, that's also, you know, in general part of the margin decremental question that I answered earlier. It's going to be a little bit higher expenses than we would normally see just because of the weak sales quarter when you look on a percent of sale basis. Correct.

Okay.

Thank you.

Thanks, Matt, for your questions.

Our next question will come from David Kelly from Jefferies.

Good morning, David.

Hey, good morning, team. Thanks for taking my question. I believe you noted some Tier 1 and partial vehicle builds and autos. Just curious as to how meaningful you think that build is, and maybe put another way, do you see any change to your targeted outgrowth algorithm and autos in the coming quarters?

Sure. Yeah, you know, I think certainly it's well known that there are a lot of vehicles that have been produced minus maybe some modules and things like that that are sitting out that are kind of half finished or 90% finished. So clearly in those types of vehicles, most of our products are in those vehicles ready to go, but they're not reported as car built. So it affects kind of that growth over car built number. And while we don't think it was a significant part of our third quarter, in fact, there was some inventory impact there. If you look back at over the last 12 months, so let's say the last four quarters as a whole, because that's when we kind of started to see some of this. And if you look back, we began to talk a little bit about this in the fourth quarter last year. It's an imperfect quarter. number because you kind of have to back your way into it. We don't have perfect visibility. We would probably estimate that from inventory builds within the automotive market over the last 12 months, it's probably in that $20 million, maybe as high as $25 million worth of inventory build during that period of time. Probably reasonably level loaded across that time. Not necessarily all done in one quarter. So clearly there's a higher level inventory there. Some of that will kind of get cleared out in the math when they finish vehicles and put them on the lots. And then the others really sitting mainly at tier ones where they've been instructed by the OEMs to carry a heavier inventory position in order to support the ability to ramp up as quickly as possible. Some of that will work itself back out over time. We don't really know when that might be And our conjecture right now is it probably doesn't all work itself back out. Some level of that becomes a bit of the new normal of how to operate in a pretty disruptive environment and supply chain. So we will see some of that kind of work its way back out over time. But as far as, you know, impacting our outgrowth sort of algorithmically, but inventory, but also vehicle mix, you know, the focus on higher-end vehicles, the focus on EVs. Those are all higher content for us. That's been quite favorable for us. We've got some wins that have allowed us to actually gain some market share and some pockets as well. So I think we're in a positive trend, certainly, on our outgrowth algorithm.

Okay, got it. Thank you. That's really, really helpful, Culler. And then just switching gears, two sizable acquisitions now, year to date. How should we think about ongoing M&A appetite, just given your earnings power and what feels like really strong free cash flow visibility here?

Yeah, you know, we've been talking about for a while that, you know, back in 2020, we would make sure we were gearing up and we had the balance sheet so that as the M&A activity picked back up over the past, 12, 15 months that we were going to be ready for that. And so two acquisitions, that's what we were hoping for is to find some nice acquisitions to fit, which we have. And really, there's no change to our ongoing strategy on acquisitions. We continue to look. The balance sheet remains strong from a net leverage perspective, still quite low. So it gives us the opportunity to really take a look at a lot of different assets out there. And, you know, for us, we've talked about a number of different end markets that we would look at, ranging from, you know, commercial vehicles we talked about, industrial end markets. Of course, we'd look at electronics-type businesses that tuck into what we have today. And so, you know, we continue with our activity on that front. It's still our priority, and that's our, you know, our goal. Our first use of cash is acquisitions.

Okay, great. Thanks so much, Mino. Appreciate it.

Thanks for your questions, David. We'll take our next caller, please.

Our next question comes from the line of Christopher Glenn from Oppenheimer. You may begin.

Hey, I was just looking for an update on the capacity shift and expansion for electronics into the Philippines, how that's going and how we might consider the you know, either cost savings or productivity throughput, you know, impact as the timeline progresses?

Yeah, so clearly that's a lot of footprint work we've been doing in the power semiconductor business, and we've talked about that quite a bit. You know, the new factory location has been completed. You know, we've been qualifying lines as we've been boarding them in. I would say it's a challenging environment. to do that ramp up. First of all, to get the equipment as quickly as you'd like. Secondly, customer approvals can take a long time. And in today's world, that is all done virtually. You can't get customers in for visits because of the COVID situation. So that kind of puts some challenges to it. But with that said, we're kind of pretty well on track. We see that kind of concluding into the Philippines and getting the bulk of that. kind of mid to late next year. And so the bulk of the impact and the pickup from that will happen going into 2023. And there's ongoing work beyond that as well as we continue to work on our footprint and our cost position to be as competitive as possible in the power of semi-connectors. Great. Thank you.

Thanks, Chris, for your follow-up questions. That concludes today's call. Thank you for joining us and your interest in Little Fuse. We look forward to speaking with you during the Baird and Stiefel conferences. Have a great day.